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Standard Errors in Event Studies

Published online by Cambridge University Press:  06 April 2009

Michael Salinger
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Abstract

Even if true abnormal returns are uncorrelated, estimated abnormal returns are not. This paper presents a simple formula for the variance of estimated cumulative abnormal returns. Both returns and dummy variable procedures for estimating the standard error correctly, taking account of both intertemporal and contemporaneous correlation of estimated residuals, are discussed. They are then applied to an event study of post-merger performance. It is shown that ignoring either the intertemporal or contemporaneous correlation of residuals can result in significant underestimates of standard errors.

Information

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 27 , Issue 1 , March 1992, pp. 39 - 53
Copyright
Copyright © School of Business Administration, University of Washington 1992

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